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Sri Lanka and the globalised world – lessons from our neighbours

I know I haven’t shown much love toward my blog recently; I’ve been quite preoccupied with family commitments and other such similar activities while on holiday. However, I did manage to jot down little pieces of notes whenever and wherever I had any spark of inspiration. Compiling these notes has been a bit of a challenge though. Nevertheless, I thought I should pen something down to coincide with Sri Lanka’s 64th Independence Day celebrations last week. Unfortunately, I couldn’t manage to finish the post in time, so please do accept my apologies for the delay.

This post was inspired by my travels in Sri Lanka and my many discussions with villagers about their aspirations and their dreams of a glorious future, for themselves and their country. So I thought I should share some of my observations about where we as a nation need to head, and what steps we need to take, in order to get there – with learning’s and experiences of our neighbours both near and afar. Please be forewarned, this post is fairly long, and you might want to grab yourself a strong cuppa and take your time to digest my musings on what we as a nation would have to face on our quest to seek economic development and with it, prosperity for our children and future generations.

Introspection

When we begin thinking about the challenge of development, the first thing we need to do is to engage in some brutally honest introspection. Our country, our people and our leaders alike, must be honest with ourselves and look clearly at exactly where we stand in relation to other countries. We need to ask ourselves, “To what extent is our country advancing or being left behind by the world, and to what extent are we adapting to and taking advantage of all the new platforms for collaboration and competition?”

Why do we need to ask ourselves this question? Can’t we simply jump into development via increased investment and increased economic activity and then see where the road takes us? The short answer is “no”, and this is simply because of one factor and one factor alone. The entry of China into the world market; “how is China even related to our introspection?” I hear you ask. In my opinion, their entry is possibly the single most important factor for the world at large. Why do I say this? China can do high-quality low cost manufacturing better than any country that exists today, and increasingly, it also can do high-quality higher-cost manufacturing too. With China coming on so strong, no country today can afford to be anything less than brutally honest with itself.

One must not forget that development is a voluntary process, therefore, you need a positive decision to make the right steps, but it starts with introspection – looking brutally honestly at our strengths and our weaknesses, and exactly what both will mean in a modern and increasingly competitive world.

When my grandparents grew up, their competition was their next-door neighbours. Today our competition is an Indian or a Japanese or a Chinese. You know where you rank very quickly in the modern world; you are now competing with everyone else on the planet. The best talent today (and in future) will earn more, and if you don’t measure up, someone will replace you – and it won’t be the guy across the street.

The 100 foot reform

Our country’s decision to develop rests on getting three very important things right.

1) The first thing is to get the right infrastructure to connect more of our people with the tools and platforms that help them collaborate and compete with the rest of the world. These can be cheap internet bandwidth and mobile phones to modern airports, roads and a consistent supply of power.

2) The second is the right educational system to get more of our people innovating and contributing to the world’s pool of knowledge.

3) Third is the right governance – from fiscal policy to the rule of law to the quality of the bureaucracy. This point is often lost. With all the discussion about globalisation and how companies need to compete, people lose sight of the fact that globalisation is also a competition between one country’s public sector and another’s. That is, you need a quality bureaucracy to channel, govern and enhance the creative energies of a country so our people as individuals can not only imagine new products and services but also bring them to life and take them to the marketplace.

During the late 70’s, but particularly after the fall of the Berlin Wall, as the world really started to develop and converge, a lot of countries began trying to reform themselves accordingly. They focused on improving education, and infrastructure and in particular adopting better governance. But most of the focus in the area of governance was really about adopting more market-friendly macroeconomic policies. This is what I like to call the ‘100 foot reform’.

These reforms were initiated by a small handful of leaders in countries such as China, Russia, Mexico, Brazil and India. These small group of reformers often relied on the leverage of authoritarian political systems to unleash the state-smothered market forces of their societies. They pushed their countries into more export-oriented, free-market strategies based on privatisation of state companies, deregulation of financial markets, currency adjustments, foreign direct investment, shrinking subsidies, lowering of protectionist tariff barriers, and introduction of more flexible labour laws – from the top down without ever really asking it’s people. Ernesto Zedillo, who served as president of Mexico from 1994 to 2000 and was minister of planning and budget before that, once remarked that all the decisions to open the Mexican economy were taken by three people. How many people do you suppose Deng Xiaoping consulted before he declared, “To get rich is glorious,” and uncorked the Chinese economy, or when he dismissed those who questioned China’s move from communism to free markets by saying that what mattered were jobs and incomes, not ideology? Deng tossed over decades of Communist ideology with one sentence: “black cat, white cat, all that matters is that it catches mice.” In 1991 when India’s finance minister, Manmohan Singh, took the first tentative steps to open India’s economy to more foreign trade, investment and competition, it was a result not of some considered national debate and dialogue, but of the fact that India’s economy at the time was so sclerotic, so unappealing to foreign investors, that it had almost run out of foreign currency. When Mikhail Gorbachev started dabbling with ‘perestroika’, it was with his back against the Kremlin wall and with few allies in the Soviet leadership.

What all these leaders confronted was the irrefutable fact that more open and competitive markets are the only sustainable vehicle for growing a nation out of poverty, because they are the only guarantee that new ideas, technologies and best practices will easily flow into their country and that private enterprises, and even government, will have the competitive incentive and flexibility to adopt those new ideas and turn them into jobs and products. This is why non-globalised countries, those that refused to do any macroeconomic reform – North Korea, for instance – actually saw their per capita GDP growth shrink in the 90’s, while countries that moved from a more socialist model to a globalising model saw their per capita GDP grow in the 90’s. As David Dollar and Art Kray conclude in their book, ‘Trade, Growth and Poverty’, proclaim that economic growth and trade remains the best anti-poverty programme in the world.

The problem for any globalising country – like ours – is the thinking that we can stop from the 100 foot reform stage. That is, privatise state owned industries, deregulate utilities, lower tariffs, and encourage export industries etc. and we automatically have a success formula. But as the world started to get smaller, enabling China to compete everywhere with everyone on a broad range of manufactured products, enabling India to export their brainpower to everywhere, enabling corporations to outsource any task anywhere, and enabling individuals to compete globally as never before, the ‘100 foot macroeconomic reform’ alone is not sufficient to maintain a sustainable growth path. A deeper process of reform is required – one that would transform education, infrastructure, and governance in a much more profound manner.

Enter the ‘10 foot reform’

Many of the key elements that I am referring to were best defined by the research done by the World Bank’s International Finance Corporation (IFC) and its economic analysis team led by its chief economist Michael Klein in 2004. What do we learn from their work? To begin with, you don’t grow your country out of poverty by guaranteeing everyone a job. If it were just a matter of the number of jobs, solutions would be easy. For example, state owned enterprises could absorb all those in need of employment. The real issue is not just employment, but increasingly productive employment that allows living standard to rise. State owned enterprises and state subsidised private firms usually have not delivered sustainable productivity growth, and neither have a lot of other approaches that people assume are elixirs of growth. Just attracting more foreign investment into a country doesn’t automatically do it either, and even massive amounts of investment in education won’t guarantee it.

Productivity growth and, hence, the way out of poverty, is not simply a matter of throwing resources at a problem. More important, it is a matter of using resources well. In other words, countries not only grow out of poverty only when they manage their fiscal and monetary policies responsibly from above, but also within a system that encourage innovation and growth from a micro-level. In recent years a lot of attention and moral concern has been devoted to the problem of persistent poverty, particularly in Africa. That is a good thing. But persistent poverty is a practical problem as well as a moral one, and we do ourselves no good to focus on our moral failings and not the practical shortcomings of the countries and governments involved. Poor people grow out of poverty when their governments create an environment in which educated workers and capitalists have the physical and legal infrastructure that makes it easy to start a business, raise capital, and become entrepreneurs, and when they subject their people to at least some sort of competition from beyond – because companies and countries with competitors always innovate more, better, and faster.

The IFC drove home this point with a comprehensive study of more than 130 countries, called ‘Doing Business’. The IFC asked 5 basic questions about doing business in each of these countries, questions about how easy or difficult it is to

1) Start a business in terms of local rules, regulations and licence fees,

2) Hire and fire workers

3) Enforce a contract

4) Get credit, and

5) Close a business that goes bankrupt or is failing.

In other words, those countries that make all these things relatively simple and friction-free have undertaken reform at a more granular level – or ‘10 foot reform’ as I’d like to call it – and those that are not are stalled in the ‘100 foot reform’ and are not likely to thrive in the modern more interconnected world. The IFC’s criteria were inspired by the brilliant and innovative work of Hernando de Soto, who has demonstrated in Peru and other developing nations that if you change the regulatory and business environment for the poor, and give them the tools to collaborate, they will do the rest.

If you want to know why two decades of macroeconomic ‘100 foot reform’ at the top have not slowed the spread of poverty and produced enough new jobs in key countries of Latin America, Africa, the Arab world and the former Soviet Empire, it is because there has been too little reform at the 10 foot level. According to the IFC report, if you want to create productive jobs, the kind that lead to rising standards of living, and if you want to stimulate the growth of new businesses, the kind that innovate, compete and create wealth, you need a regulatory environment that makes it easy to start a business, easy to adjust a business to changing market circumstances and opportunities, and easy to close a business that goes bankrupt, so that the capital can be freed up for more productive uses.

The IFC’s study offers a five step checklist for 10 foot reform.

1) Simplify and deregulate wherever possible in competitive markets, because competition for consumers and workers can be the best source of pressure for best practices, and overregulation just opens up the door for corrupt bureaucrats to demand bribes.

2) Focus on enhancing poverty rights. Under de Soto’s initiative, the Peruvian government in the 90’s has issued property titles to 1.2 million urban squatter households. Secure property rights have enabled parents to leave their homes and find jobs instead of staying in and protecting their property. The main beneficiaries are their children, who can now go to school.

3) Expand the use of the internet for regulation fulfilment. It makes it faster, more transparent, and far less open to bribery.

4) Reduce court involvement in business matters, and

5) Make reform a continuous process. Countries that consistently perform well across the ‘Doing Business’ indicators do so because of continuous reform.

So where do we as a nation stand? We have been handicapped for the last three decades since we weren’t allowed to compete and collaborate during this phase of development; so we enter the competition three decades behind countries such as Thailand, Malaysia, and South Korea. Therefore, we still do need to implement ‘100 foot reform’, but if we are to seriously challenge our current competitors (Thailand, Malaysia, Bangladesh, Vietnam etc.), we need to empower our people – and I am not referring to the Colombo city dwellers – but to our people as a whole, the ones who are yet to experience any form of development. I see reform at the 100 foot level taking place in drips and drops at the moment. However, the question really is, do we have a strategic plan on where we want to be 15 years’ from now? Are we taking these developmental baby steps with a clear strategic focus? Or are we simply erecting monument after monument to give us the illusion of development? I see some people profiting today, and at least for now, they seem content. But what about those with no access to grow, to develop, to compete; the ones who feel left out from the current progress and development initiatives we see around us? They are the ones most vulnerable to adopting an alternative ideology. We saw this in the 70’s with communism (JVP) and we saw this in the 80’s with communalism (LTTE). Should we not learn from mistakes of our past? We need to acknowledge, address and meet head on this angst that youth from lesser privileged backgrounds feel. Development that doesn’t truly benefit every person in our country isn’t true development. It’s only a façade which lead to mistrust, jealousy, hate and division.

As Martin Luther King, Jr.’s famous ‘I have a dream’ speech, which envisions a day when American society will become colour blind; my personal dream is to witness a day when a little kid in Matara or Jaffna, can login to a computer, search for information in Sinhalese or Tamil and be empowered to access the world’s knowledge as anyone else on the planet. Until that day arrives, we as a nation would not have reached our true development potential.

I fully agree with the facts stated in your blog..Sri Lanka had opened its doors for open economy sometime ago, but due to government bureaucracy, this is not giving any benefit to the masses..except to big wigs. First we have to find a way to overcome this situation.
For e.g Bangladesh which is a very poor country, but how they have overtaken Sri Lanka in the RMG business..What happened to the 3000 garment factories which the ex President opened and envisaged many more..all of them are closing one after another thus leading to unemployment of many rural youths..
I cannot say anymore..hoping for a better future for everyone in Sri Lanka..